What makes a computer run smooth

The video card matters most, with the exception of a very few games. The CPU is next. The amount of RAM is next. The hard drive speed is last. In your case, the video card desperately needs an upgrade, and 4 GB of RAM instead of two would do wonders.
 
Depends on what you mean by smooth. For games, its what aevm said. For pretty much everything else, lots or ram and a capable CPU and well maintained system (software wise). It amazes me how much better a formated and reinstalled system (with a clean OS) can do for a system thats hasn't seen a wipe since it came off the factory line and has been piloted by people who just know how to use the PC.

The one thing that really bothers me when I sit down a someone elses home PC (and I know it really doesn't matter but I feel obligated to correct it) is when they have 50 icons on the desktop and another 20 icons in the system try. Like seriously?? C'mon! How can you live like this!
 
LOL, that's what my Dad does. I have 7 icons in the desktop. He has more like 700. :)

Yeah, absolutely, there are things you can do apart from buying good hardware.

- Defragment the hard drives.
- Run an antivirus (and update its definitions often).
- Run something like Spybot or AdAware (and again update the definitions often).
- Reinstall Windows every 6 months to get rid of the bloat
- Backup stuff on DVD-R disks so you don't lose much if something goes wrong
 
To run smoothly on your current setup: winxp

1. Have less than 10 icon on the desktop
2. Change the appearance of window to optimize for performance
3. Turn off system restore monitor
4. Disable any thing that is not needed at startup - msconfig
5. Stop using IE-use firefox w/ adblock plus
6. A very robust software for optimize windows is "Dr. Salman's windows power tools"